The business structure you choose determines everything. From day-to-day functioning to taxes, to how much personal assets are at risk. The right business structure gives you an appropriate balance of legal protections and benefits.
Small business owners usually structure their companies as either LLCs or C corporations. The LLC vs C Corp decision is not quite straightforward.
LLCs and corporations differ in terms of formation, ownership, taxes, and governance requirements. Hence, it is vital that this choice is made wisely.
This decision will influence the ability to raise money from investors, and the deftness with which you can expand in the future.
So, the LLC vs C Corp decision also impacts the time spent in the formation of a business entity and successfully sustaining the business.
A corporation is a legal entity that is distinct from its owners. So, corporations can make a profit, be taxed, and can be held legally liable.
C corporations enjoy limited liability, yet they are subject to corporate income taxation. Hence, any distribution from the earnings and profits of a C corporation is treated as a dividend for income tax purposes.
“Earnings and profits” is a tax law concept like the financial accounting concept of retained earnings. So, Exceptions are made in certain distributions in exchange for stock rather than as dividends.
Such exceptions include distributions in complete termination of the interest of a shareholder. Therefore, distributions in the liquidation of the corporation are also excused.
Therefore, when it comes to raising capital, Corporations have leverage. So, they can raise funds through the sale of stock. This can also be a benefit in attracting employees.
In a limited liability company, the owners are not personally liable for debts or liabilities of the company. Limited liability companies are hybrid entities.
Therefore, an LLC takes advantage of the benefits of both the corporation and partnership business structures.
Profits and losses can get passed through to personal income without facing corporate taxes. However, members of an LLC are considered self-employed. So, they must pay self-employment tax contributions towards Medicare and Social Security.
Let’s discuss the difference between LLC vs C Corp
When forming an LLC, you first have to file a document called the articles of organization with your state’s business filing agency.
In other words, in C-corporations you start by filing articles of incorporation with your state’s business filing agency.
LLCs need less extensive record-keeping, operational processes, and reporting than C corp. So, corporations have an entirely unassociated life autonomous from its shareholders.
Let’s suppose a shareholder leaves the company or sells their shares. In such a case, the C corp can continue doing business relatively undisturbed.
LLCs can have a limited life. When a member joins or leaves an LLC, some states may need the LLC to be dissolved and re-formed with new membership.
Therefore, exceptions are made if there is already an agreement in place within the LLC for buying, selling, and transferring ownership.
Most importantly, unlike LLCs, corporations pay income tax on their profits. Also, in some cases, corporate profits are taxed twice. First, when the company makes a profit.
Then dividends are paid to shareholders on personal tax returns. Hence, this is probably the only criterion which sets apart a C Corp very distinctly from an LLC.
The limited liability feature of LLC is not unlike that of a corporation. Meanwhile, the availability of flow-through taxation to the members of an LLC is a feature of partnerships
Also, corporations offer the strongest immunity to their owners from personal liability. But the expense to form a corporation is higher than LLC.
Firstly, LLCs protect one from personal liability in most instances. So, personal assets will not be at risk in case the LLC faces bankruptcy or lawsuits. Personal assets might include vehicle, house, and savings accounts.
Corporations can be a good alternative for medium- or higher-risk businesses. For instance, businesses that need to raise money. Also, businesses prefer C Corp that plan to “go public” or eventually be sold.
Secondly, LLCs too can be a good option for medium- or higher-risk businesses. Owners with significant personal assets prefer protection. And some owners might want to pay a lower tax rate than they would with a corporation.
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